Say you're concerned

that some people can't afford to buy shoes.

A simple solution would be to pass a law

lowering the price of shoes.

The idea is that

at a lower price

more people will have access to shoes.

In fact, that policy

will have the exact opposite effect.

Fewer people will have access to shoes

if we lower the price by law.

Why?

Let's go back to supply and demand.

Saying that the equilibrium price

for a pair of sneakers is $60.

Remember that is the only price

where quantity supplied

is equal to quantity demanded.

Then say we pass a law

that prevents stores

from charging more than $30

for a pair of shoes.

We call this a price ceiling,

since it sets an upper limit on the price.

Since this price ceiling

is actually below the equilibrium price

it forces the price downwards.

We say that this price ceiling is binding,

but when we change the price,

two other things changed.

First we had a move along

on the demand curve.

At a lower price

consumers want to buy more shoes.

Second, we also get a move along

on the supply curve.

Producers supply fewer shoes

at the lower price.

So by moving price away

from the equilibrium

we've moved quantity demanded away

from quantity supplied.

In this example

it means that we have a shortage

of 800 pairs of shoes.

At $30 a pair

consumers want 800 more pair of shoes

than the producers are able to supply.

Which quantity actually gets transacted?

Well consumers can't buy goods

that producers haven't produced.

So the new quantity of shoes transacted

is the quantity supplied

which is actually lower

than what we had before the price ceiling.

So that's how making a product

artificially cheaper

actually makes it less accessible

to consumers.

All the time politicians

introduce price ceilings

to try to help consumers

and all the time economists tell them

it's a terrible idea

and all the time

those price ceilings result in shortages.

For example over the past several years

the government of Venezuela

has imposed price controls

on various types of food

like meat and beans

and big surprise

those basic foods have disappeared

from store shelves.

While products that don't have price ceilings

are still available.

We also see price ceilings in some cities

in the United States

where the local governments

set limits on apartment rents.

Just like with shoes

people respond to those lower prices.

More people try to move into those cities

while building owners

reduce the quantity supplied

by turning them into condominiums

or refusing to build new housing.

Policymakers also sometimes think

that it's a good idea

to artificially raise prices.

They can pass a law saying

that the price can't go below

a certain level.

This is called a price floor.

Once again look at how this shows up

in supply and demand.

If the price floor

is set above the equilibrium price

it is called a binding price floor,

and it will artificially raise that price,

but once again

when we change the price two things happen.

First we get to move along

on the supply curve

with producers supplying more

at the higher price.

Second, we also get a move along

on the demand curve

with consumers buying less

at that higher price.

Higher quantity supplied

and lower quantity demanded

results in a surplus.

At that higher price

producers are supplying

more than consumers want to buy.

One of the most common places we see this

is with minimum wages.

If a minimum wage

is above the market clearing wage

for low skilled labor,

it will cause more people to look for work,

basically an increase

in the quantity supplied,

but it will force employers to cut jobs;

a decrease in the quantity demanded.

In this case we get a surplus of workers

otherwise known as unemployment.

There are more people wanting to work

than there are jobs available.

Now there are plenty of economists

who argue that these effects are fairly small

and that the benefits

of raising the minimum wage

outweigh the costs.

We're not going to get into that debate here.

Just understand that our price floor model

is the starting point for the discussion

but not necessarily the last word.

So in summary

price controls move prices

away from the equilibrium.

They move quantity supplied away

from quantity demanded.

Price ceilings create shortages

and price floors create surpluses.